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The Economics of Climate Change Mitigation. Jean-Marc Burniaux OECD Environment Directorate
The Economics of Climate
Change Mitigation.
Jean-Marc BurniauxOECD Environment Directorate
Main message
• Ambitious action to reduce emissions is economically rational…
• … under some conditions:
– participation by all major emitters (countries, sectors, gases)
– to start now
– to use an efficient policy mix (carbon pricing R&D policies + specific complementary policies)
– to support action in developing countries (finance, technology, capacity building)
Structure of presentation
• What if we do nothing ?
• What needs to be done ?
• What could be the cost of doing what needs to
be done ?
• How can we reduce this cost ?
• How to move from now to global action ?
the “carbon leakage” issue
building political support for a global action
What if we don’t introduce
more ambitious policies?
-
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Gt CO2 eq
1. Excluding emissions from Land Use, Land-Use Change and Forestry. Source: OECD, ENV-Linkages model.
Projected GHG emissions1 by country/region (2005-2050)
ROW
BRIC
Rest of OECD
USA
Western Europe
… global temperature increases
by more than 5ºC over long term…
5
Some policy simulations
0
10
20
30
40
50
60
70
80
90
100
Gt
CO
2e
q
Source: OECD, ENV-Linkages model.
GHG emission paths under alternative world carbon price scenarios
Baseline
550ppm modest overshooting
550ppm high overshooting
-50% in 2050
650ppm
75% reduction from 2005 level
6
The cost of mitigation action
100
150
200
250
300
350
400
450 2
00
5
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
Ind
ex
2005
=10
0 550 ppm. GDP loss
World GDP path in the absence of further policy action
World GDP path under the mitigation reference scenario
Gap in 2050 = 4.8%
Technology improvements are
essential to reduce future costs
• Getting prices right will reduce emissions and give
incentives for technology development & deployment
• R&D policy alone may give new breakthrough technologies, but would not in itself lead to deployment of existing and new technologies or efficient practices
• But uncertainty and market failures may discourage
investors, so need specific R&D policies
Carbon pricing and R&D support are both needed
7Source: WITCH model
Carbon leakage and
competitiveness — an obstacle?
• Two elements: market shares/relocation and spill-
over effects in energy markets
• As the coalition of acting countries increases, the
leakage rate falls rapidlye.g. leakage rates for EU-only acting to reduce emissions by
50% to 2050 = 20%; if all Annex I participate = 9%
• Policy responses to carbon leakage:
– Border Tax Adjustments
– International sectoral agreements
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Effects of countervailing import tariffs on carbon leakage and mitigation costs
without a
countervailing
tariff
with a
countervailing
tariff
without a
countervailing
tariff
with a
countervailing
tariff
Leakage rates in 2050 19.9% 6.5% 9.1% 5.2%
GDP effect in 2050
In participating countries -3.0% -3.4% -2.7% -2.9%
In non-participating countries 0.0% -0.2% -0.1% -0.5%
World -0.5% -0.7% -0.8% -1.7%
Source: OECD, ENV-Linkages model.
Reduction of 50% in EU countries
in 2050
Reduction of 50% in Annex I
countries in 2050
International sectoral approach
10
- 50% in
EU only
in 2050
-50% in EU +
-50% in EEIs
(no permit
fungibility)
-50% in EU +
-50% in EEIs
(permit
fungibility)
GHG emissions -3% -15% -14%
MAC - EU countries US$ 293 US$ 328 US$ 454
MAC – energy intensive
industries (worldwide)
US$ 0 US$ 682 US$ 454
GDP loss in 2050 - EU -3.0% -3.5% -3.9%
GDP loss in 2050 - non-EU 0.0% -1.8% -1.4%
GDP loss in 2050 - World -0.5% - 2.1% -1.8%
Source: OECD ENV-Linkages model
Next developments
• Stage 2 paper (end of April 2009)
– From now towards a wider carbon pricing EVN-Linkages):
• Through removing existing energy subsidies
• Through scaling up the CDM
• By linking existing ETS
• By combining regional ETS and worldwide sectoral agreements (EIIs)
• By incorporating emissions from deforestation
– What financial incentives to build a stable coalition (WITCH)
